Cyprus shows the world just how rotten the Eurozone really is

Allister Heath was Editor of City A.M. for six years up until June 2014.

Allister Heath

IT is looking grim for Cyprus. Following its decision to reject the EU bailout, largely because of its own u-turn on raiding savings, Cyprus’ banks are being kept afloat by liquidity from the European Central Bank. Capital controls are being discussed to prevent funds from fleeing the island – jeopardising the free movement of capital, a key EU principle – when the banks are eventually allowed to reopen.

The situation, in other words, is nightmarish, with the public banned from accessing its funds – though ATMs are allowing withdrawals of up to €700 per day – and repressive restrictions being readied. Companies cannot operate under such conditions, and will soon start to collapse.

There are now four possible outcomes: either Cyprus surrenders and passes a modified cash grab (possible, but may involve seizing private pensions and could turn ugly); or the Eurozone blinks and hands over cash anyway (quite likely); or Cyprus gets bailed out by Russia, jeopardising the island’s relationship with Brussels (possible); or it becomes the first country to quit the euro (not yet the most likely outcome, but increasingly possible). The Cyprus affair won’t destroy the Eurozone – but it will show the world just how rotten the whole superstructure really is.

SOCIAL ENGINEERING
From 2015, the taxpayer will pick up the bill for a small share of most families’ childcare. Many will welcome this announcement, but there are better ways of helping parents.

The subsidy to childcare will only apply when registered individuals and institutions look after the child (not family), only if both parents work (thus deliberately discriminating against families where one parent chooses to put their careers on hold to look after kids) and cuts off when one parent earns £150,000 a year (which means that a family with two parents at work earning a combined £299,999 will get help, while one with one parent who earns a few thousand a year, perhaps because they are starting up a business, and the other £150,000 would get nothing). Low income families will be helped in other ways. Families should have the right to choose their own childcare arrangements; the government should neither discriminate in favour or against those with a stay at home parent. Yet that is already what the tax code does today – because of personal allowances and progressive taxation, it is better for each parent to earn £20,000 than for one to make £40,000 – and this new rule will merely worsen this deplorable and illiberal state-sanctioned social engineering.

A much better solution would be to stop seeking to subsidise childcare – and get rid of child benefit – and introduce a new Family Transferable Allowance. This would allow parents to keep more of their income, cease distorting incentives, stop trying to push more parents into work, and would allow people to make their own choices, free of nudging from the state. Under my favourite version of this idea – and using illustrative figures – each family member would be given an income tax free personal allowance; working parents would be allocated £10,000 of tax-free income; a stay at home partner would be allocated £5,000 in tax-free income, which could be given to the working partner; children would also be allocated their own personal allowances, perhaps starting at £3,000 for the first child and falling to £2,000 for subsequent ones. These would also be transferred to one or both parents. Families would be helped – but their choices would no longer be distorted. This sort of reform would make far more sense than what George Osborne will unveil in today’s Budget.